Lenders not adequately compensated for risk, leading to higher rates during recessions.
The study looked at how commercial lenders in the U.S. are compensated for commitment loans during economic downturns. By analyzing data from the Loan Pricing Corporation (LPC) DealScan database before, during, and after the 1990/91 and 2001 recessions, the researchers found that constant loan spreads may not adequately cover lenders' risks with less creditworthy borrowers. During recessions, lenders tend to increase rates for new borrowers and adjust their loan portfolios to manage risks and rewards effectively.